Let's say you use Levered FCF rather than Unlevered FCF in your DCF- what changes?
Give this one a try later!
Levered FCF gives you Equity Value rather than Enterprise Value since the
cash flow is only available to Equity investors.
,How do you treat Preferred Stock in the formulas above for Beta?
Give this one a try later!
It should be counted as Equity because Preferred Dividends are not tax-
deductible unlike interest paid on Debt.
Let's take a look at companies during the financial crisis. Does WACC Increase or
decrease?
Give this one a try later!
Break it down and think of the individual components of WACC: Cost of Debt,
Cost of Preferred, and the percentages for each one.
Then think about the individual components of Cost of Equity: the Risk-Free
Rate, the Equity Risk Premium, and Beta.
- The Risk Free Rate would decrease because governments worldwide would
drop interest rates to encourage spending
- But then the Equity Risk Premium would also increase by a good amount as
investors demand higher returns before investing in stocks
- Beta Would also increase due to all the volatility
- So overall, we can guess that CoE would increase because the latter two
increases would likely make up for the decrease in the RFR.
Wacc:
- The Cost of Debt and Cost of Preferred would both increase as it would
become more difficult for companies to borrow money
- The Debt to Equity ratio would likely increase because companies' share
prices would fall, meaning that Equity Value decreased for most companies
while Debt stayed the same
, - So proportionally Debt and Preferred would likely ake up a higher
percentage of a company's capital structure
- Cost of Debt and Cost of PReferred both increase so that shift doesn't
matter too much
- As a result WACC almost certainly increases because almost all these
variables push it up- the only one that pushes it down is the reduced RFR>
All else being equal did companies become more valuable or less valuable
during the crisis.
Less valuable- because the market discounted their future cash flows at
higher rates so WACC must have increased.
Why do you use 5 or 10 years for the "near future" DCF Projections?
Give this one a try later!
That's about as far as you can reasonably predict for most companies. Less
than 5 years would be too short to be useful and more than 10 years is too
difficult to project for most companies?
What's the point of Free Cash Flow anyway? What are you trying to do
Give this one a try later!
Give this one a try later!
Levered FCF gives you Equity Value rather than Enterprise Value since the
cash flow is only available to Equity investors.
,How do you treat Preferred Stock in the formulas above for Beta?
Give this one a try later!
It should be counted as Equity because Preferred Dividends are not tax-
deductible unlike interest paid on Debt.
Let's take a look at companies during the financial crisis. Does WACC Increase or
decrease?
Give this one a try later!
Break it down and think of the individual components of WACC: Cost of Debt,
Cost of Preferred, and the percentages for each one.
Then think about the individual components of Cost of Equity: the Risk-Free
Rate, the Equity Risk Premium, and Beta.
- The Risk Free Rate would decrease because governments worldwide would
drop interest rates to encourage spending
- But then the Equity Risk Premium would also increase by a good amount as
investors demand higher returns before investing in stocks
- Beta Would also increase due to all the volatility
- So overall, we can guess that CoE would increase because the latter two
increases would likely make up for the decrease in the RFR.
Wacc:
- The Cost of Debt and Cost of Preferred would both increase as it would
become more difficult for companies to borrow money
- The Debt to Equity ratio would likely increase because companies' share
prices would fall, meaning that Equity Value decreased for most companies
while Debt stayed the same
, - So proportionally Debt and Preferred would likely ake up a higher
percentage of a company's capital structure
- Cost of Debt and Cost of PReferred both increase so that shift doesn't
matter too much
- As a result WACC almost certainly increases because almost all these
variables push it up- the only one that pushes it down is the reduced RFR>
All else being equal did companies become more valuable or less valuable
during the crisis.
Less valuable- because the market discounted their future cash flows at
higher rates so WACC must have increased.
Why do you use 5 or 10 years for the "near future" DCF Projections?
Give this one a try later!
That's about as far as you can reasonably predict for most companies. Less
than 5 years would be too short to be useful and more than 10 years is too
difficult to project for most companies?
What's the point of Free Cash Flow anyway? What are you trying to do
Give this one a try later!
